Singapore: MAS rebalancing growth and inflation risks
- Advance GDP growth for 1Q23 was weaker than expected at 0.1% YoY and -0.7% QoQ sa
- Weak growth due to global external headwinds, but watch for China’s reopening spillovers in 2H
- Implications for our forecast: We maintain 2023 GDP growth of 2.2%
- SGD NEER to hold 0-1% above its mid-point this year. Upside risks in USD/SGD cannot be dismissed
Advance GDP estimates for 1Q23 announced on Friday saw economic growth moderate significantly amid external headwinds. Headline real GDP growth slowed to 0.1% YoY, from 2.1% in the previous quarter. Notably, the economy contracted on a sequential basis, declining 0.7% QoQ sa in 1Q23 from 0.1% expansion in the previous quarter.
Weakness in the manufacturing sector is the fundamental drag behind the sharp deceleration. The manufacturing sector is in recession. Manufacturing output marked the worst performance since end-2015, shrinking by 6.0% YoY in 1Q23, deepening from the 2.6% drop in 4Q22. Sequentially, the sector was projected to fall by 5.2% QoQ. Weak global external demand dampened by tight monetary policy in advanced economies and lingering geopolitical tensions has notably weighed heavily on global electronics exports, including Singapore’s. We expect a still subdued manufacturing performance at least through 1H23 before a turnaround in 2H23.
Amid downside risks from an uncertain global economic climate, the impact from China’s reopening remains a key factor to watch. While China is still a drag to non-oil domestic exports (NODX) in early-2023, we note that the decline appears to be bottoming. A more visible boost from this key market is likely to be felt from 2H23.
Overall service sector recovery has also eased, apart from still-resilient expansion in the hospitality segment. Services sector growth cooled to 1.8% YoY in 1Q23 from 4.0% in the previous quarter. Wholesale & Retail Trade and Transportation & Storage cluster was the main drag to overall services, also negatively impacted by external headwinds, and the outlook remains muted in the near-term. The cluster contracted by 1.1% YoY, from an expansion of 2.4% in 4Q22, registering two straight quarters of sequential decline (-1.0% QoQ in 1Q23 and -1.6% in 4Q22).
Meanwhile, the ‘Accommodation & Food Services, Real Estate, Administrative & Support Services and Other Services’ group collectively saw QoQ growth pick up to 1.5% in 1Q23 from 1.1% in the previous quarter. Tourism arrivals are likely to continue to recover and will have a positive spill over onto accommodation and food sector expansion, in our view. We think the next leg of recovery will likely be from a bigger return of Chinese tourists, and the impact would also be more visible in 2H23. Monthly Chinese visitor arrivals in Mar23 were ~20% of pre-pandemic (Mar-19 levels), and have room to pick up further, as flight capacity recovers through the year.
Lastly, growth in the construction sector was estimated to have expanded by 8.5% YoY in 1Q23, extending the 10.0% increase in 4Q22. We expect healthy growth momentum in this sector, given still resilient project pipeline. For instance, 40k new completions for both private and public housing are expected in 2023, the highest in about five years.
Growth momentum has slowed significantly while inflation has peaked, and likely to moderate going forward. The changing risk dynamics between growth and inflation has prompted the Monetary Authority of Singapore (MAS) to rebalance its exchange rate policy.
MAS SGD NEER policy on hold this year
The Monetary Authority of Singapore’s decision not to change the policy band’s slope, mid-point, and width did not surprise us. Since the last tightening in October 2022, the SGD NEER has, as per our model, shifted from the top to the mid-point, a sign that worries over elevated inflation were giving way to a challenging global growth landscape. The policy statement confirmed our belief that the sharp tightening between the two Octobers in 2021 and 2022 (steepening the slope from 0% to 3% and recentring the band up by 4%) were ample to dampen inflation pressures this year.
We don’t see the MAS tweaking its SGD policy in October. The central bank expects core inflation to drop more discernibly in 2H23 to 2.5% YoY by the end of 2023 from the record 5.5% in January-February. Externally, the MAS expects a sharper-than-expected downturn in the advanced economies to ease global inflationary pressures. Domestically, imported inflation has turned negative, and domestic wage growth will moderate with labour demand, especially in sectors exposed to international trade and finance. Overall, the MAS sees a negative output gap this year.
We are cautious about the SGD’s outlook because of the deeper-than-expected contraction for the Singapore economy in 1Q23 (-0.7% QoQ sa actual vs the -0.1% consensus). After the Asian crisis, the economy contracted in 1Q in 2001 (tech bubble burst), 2015 (oil price crash), 2009 (global financial crisis), and 2020 (Covid-19 recession). At some point these years, USD/SGD rose at least 7% on weak global demand fears. Although USD/SGD ended 2009 and 2020 weaker by 1.7% (not far from Friday’s 1.2% ytd fall), this was attributed to the Fed’s ultra-loose monetary policies cushioning the sharp recessions. However, the Fed today is signalling another hike in May before keeping rates high for the rest of 2023.
Hence, we share the MAS’s concerns on the drag on global investment and manufacturing from tighter financial conditions to intensify in the quarters ahead. The central bank is wary that more downside surprises in the financial system could amplify the impact of the past hikes by restraining credit growth and dampening confidence.
Given Singapore’s below-trend growth outlook, the SGD NEER should hold 0-1% above the mid-point. We would only expect the SGD NEER to fall into the lower half of the band in a global recession. Unless the USD Index (DXY) spirals below 100, we see more upside than downside risks to USD/SGD on the challenging global macro landscape.
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